The good news for Chinese stocks is that they have recovered well off the March lows. This stands to reason because China suffered first from the novel coronavirus and it is recovering ahead of everyone else. So today’s thesis is simple because the expectation is that Chinese stocks also recover faster. Moreover, when the rest of the world re-opens they would also help China keep its momentum. Today we discuss three ways to trade the Chinese recovery phase.
While this sounds easy, the bad news is that the majority of the Chinese stocks peaked in 2018. The January indices highs were still 15% below the two-year-old high mark even before this crisis. There were some stocks that did better than others, so it’s not all bad. It is important to note that there is an added wrinkle and it revolves around fraud. Recently, two high-profile Chinese companies, Luckin Coffee (NASDAQ:LK) and Iqiyi (NASDAQ:IQ), are accused of shenanigans. The subsequent headlines shook all the Chinese stocks, and Lukin is still halted. So this undoubtedly casts a shadow over the rest of the bunch. Case in point, the sector was down on Wednesday when the S&P 500 was up over 3%.
But there are still some Chinese stocks that are worth considering right now:
With all of this in mind, here’s what you should know about each opportunity.
Chinese Stocks to Trade: iShares China Large-Cap ETF (FXI)
Sometimes it is difficult to pick the winners out of a bunch. It’s easy to have a thesis that Chinese stocks should rally, but picking the right one to back can be tricky. Case in point, those who bet on LK or IQ lost a lot because of surprise headlines. While the black mark will extend in sympathy to the entire group, that effect is temporary. Instead of risking single stock stories, investors can cast a wide net by betting on an exchange-traded fund via the FXI.
The disadvantage of doing this is not having a specific fundamental trigger. The rally, then, depends on the momentum that builds from the individual components. This week, the FXI tried to break out from $38 per share, but it hit resistance from prior pivot levels. The slog from here into $41 per share is indeed full of resistance. The bulls will need strong conviction to power through all of it. The good news is that the relative strength index suggests that they could do it, but it needs the help of the general markets. Patience is a virtue in this case because the economic data will be horrendous.
The good news is that there is support below that is 14 years old. This is a base that the bulls can use to spring from. Options traders can also sell bullish spreads to generate income without needing a rally to profit. The support also means that the long-term trend from 2009 can remain intact. FXI stock has been setting higher-lows since then. This harsh crash that we just experienced did not breach that line, in fact it kissed it almost perfectly. So my assumption is that the bulls will remain in control and they will continue upwards until they breach said resistance. This will take time but it will happen without another shoe to drop.
Alibaba (BABA)
Unlike the FXI, Alibaba stock did in fact set new all-time highs this year. But it also suffered on the virus crash.
However, it is in much better technical shape then anything here. The long-term trend is still very positive and intact through all the tests. The bulls are in complete control because BABA stock continues to set higher lows. And for the last two months it’s also been setting lower highs and this is tightening into a point. Usually this means that there’s a move coming, but the direction is not yet set.
The long-term chart also suggests that the April low may serve as the baseline bulls need. This is important because it could act like October’s low did at $160 per share. This would be the certainty investors need to level up going forward. BABA stock also just met the target of a breakout pattern from $189, so I expect it to face resistance near $200. It would be normal price action for it to fade and retest the neckline it just cleared. This would allow it to gather new steam to tackle the necklines above.
Just like the FXI, BABA stock has support through $170 per share. This is confidence that the fans of the stock need in order to continue their mission. But if they lose that then the conversation changes because it would trigger a potentially nasty bearish pattern that may cause another big correction. While this is not my base case, it is a scenario that investors need to know.
On a side note that has nothing to do with its actual business, Alibaba’s management is proving itself as an upstanding team. Just yesterday, Salesforce (NYSE:CRM) CEO Mark Benioff shared in a CNBC interview that BABA has been helping other countries secure protective equipment to help fight the Covid-19 villain.
Baidu (BIDU)
Baidu stock is in even worse shape than the FXI. It had already been a broken stock even before this crisis. For some reason the bulls cannot hold any momentum at all. It has continually set lower-highs and lower-lows for almost two years. The promise of the 2017-2018 highs ended in a double top that precipitated a 70% crash. Its ties to IQ are definitely not helping its cause this week.
The chart suggests that something has to give. We should soon either find out that the company is not broken and the stock will spike in a big way. Or, conversely, it will lose the 10-year-old support zone and it crater to $50 or lower. I have no reason to believe that this is the time that Baidu will lose support, so my base case is that the upside scenario has better odds.
This won’t be easy because there is a ton of resistance on the way up. Every ledge that served as a trap door will become a test to beat on the way up. So for the investors who bought the BIDU bottom, it would be smart to trim or book some profits near $110 and $120 per share. It is likely to stall on any rally through them. So the questionable part about the rebound is sustainability, because follow through is hard to come by with BIDU stock. Let’s not forget that the first step is to hold the line; otherwise, disaster ensues. This sounds scary but it is a chart reality that exists.
Of the three kickers today, Alibaba stock is the one that looks healthiest. If investors would like to bet on underdogs, then Baidu is the one to buy here. Otherwise, using the FXI would be the way to throw a blanket long over the entire Chinese stock recovery
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
